Author: Mark Taylor, Head of International, Duncan & Toplis
Expanding a business into international markets is an exciting prospect, but one that shouldn’t be ventured into without careful consideration and planning. For the expansion to be a success, business owners need to be confident that they can thrive in a fast-changing, global tax landscape.
When moving into new territories, businesses have new sets of tax rules to navigate. These not only differ from the tax rules in the business’s home country, but they also become more complex due to questions of how different countries’ tax systems interact, and there are also international considerations such as tax treaties, transfer pricing and withholding taxes.
Here, we discuss the options available and the tax implications to be aware of when expanding overseas.
Branch vs. subsidiary
Deciding on the structure of your international expansion is one of the first things to consider, as this may have a significant impact on your overall corporate tax liabilities.
One option is to set up a branch – this is not a separate legal entity as such, but an establishment of the existing UK company which operates overseas. When choosing this option, the profits and losses from your overseas branch are likely to be taxed overseas but are also included in your UK company’s results as profits or losses of the UK company tax.
On the other hand, you might choose to set up a subsidiary, which is a legally distinct entity. In this case, provided numerous requirements are met, the UK parent company is not taxed on the subsidiary’s profits, nor will relief be available for losses of the overseas subsidiary. The results of the subsidiary are taxed separately as an independent entity overseas. This is an attractive option if you’re expanding into a jurisdiction that has strong regulatory or tax incentives for locally incorporated businesses. However, care is needed due to the way overseas countries recognise entities, as this may differ from traditionally understood UK entities.
Transfer pricing
When doing business internationally between connected companies, each government wishes to tax their fair share of profits. Accordingly, transfer pricing rules are in place to ensure this is the case.
Global regulations are becoming stricter and more joined up as policymakers look to eliminate tax gaps and mismatches between different countries’ regimes, in a bid to strengthen compliance. The Organisation for Economic Co-operation and Development (OECD) continues to spearhead a global tax crackdown, with over 145 countries having signed up to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. This marks a significant step forward in international cooperation to stamp out tax planning strategies that aim to shift profits into lower tax jurisdictions to avoid tax.
The UK’s transfer pricing rules are being updated, and draft legislation was published in the Finance Bill 2025-2026 in December last year. This confirmed enabling legislation for key updates, including:
- the introduction of a general exemption for UK to UK transactions
- implementation of a single arm’s-length standard for intangibles
- replacing the Diverted Profits Tax with new corporation tax rules
These reforms are effective for accounting periods beginning on or after 1 January 2026, however the Finance Bill is still going through the review process and is expected to receive Royal Assent in mid-2026.
VAT & Customs
Expanding a business overseas introduces complex, country-specific and cross-border VAT and Customs obligations, so it’s vital to understand the regulations in each jurisdiction.
The price at which goods are moved between countries will affect VAT and Customs liabilities and needs to be considered along with transfer pricing regulations to ensure that prices are correct for all international movements of goods and services. International trade requires consideration of both direct (corporate income tax) and indirect (VAT and Customs) to maximise efficiency. In addition, failure to properly review and document these transactions can lead to penalties, interest and shipment delays.
Other legal requirements in relation to the import and export of goods are equally important. Different countries have specific rules governing the import of certain goods and these must be understood to ensure compliance and avoid logistical delays.
VAT obligations depend on where you operate physically, where your customers are, what you’re selling (whether goods or services) and who you’re selling to – so there are lots of elements to consider.
First of all, look at where you are operating. If you have a physical footprint in a country, then you may need to register for VAT there and your obligations will start from day one. You may still also have VAT obligations if you’re selling to customers in a country where you don’t have a physical footprint, especially if this involves the sale of goods to individuals, and many countries require foreign businesses to register and collect VAT from the first sale.
If you’re selling software-as-a-service (SaaS) products, digital downloads or anything delivered electronically, then your VAT obligations will depend on the country and, in many cases, just one transaction in a new country will trigger the obligation there.
You should also track who you’re selling to and whether it’s a business or an individual, as this will make a difference to your VAT obligations. If you’re selling to a business with a valid VAT number, you likely won’t need to charge VAT and the customer will account for it. However, if you’re selling to an individual – or a business that isn’t registered for VAT – it’s likely that you’ll need to register and charge local VAT. Certain services have different place of supply rules which may also require you to register in a specific country if a reverse charge does not apply.
There are simplification schemes available within the EU so that if there are obligations to register in several EU countries, this may be remedied via a single registration in one country to enable VAT accounting for certain obligations in several EU countries.
Being prepared
The global tax landscape is dynamic and unpredictable – the recent threat of a 25% tariff on all goods sent from the UK to the US, which was quickly reversed, is proof of this. So business owners looking to expand internationally must be aware of current rules and also ‘stress-test’ any changes which may come in. Structuring the movement of goods between countries correctly will have a major impact on the ultimate profitability of your international business.
The potential to expand and build a profitable international business is huge. However, cross-border transactions can be extremely complex from a tax perspective and we can expect to see significant changes over the next couple of years.
Ensuring tax efficiency and compliance is paramount to succeeding when growing your business internationally. Duncan & Toplis offers international accounting services to businesses across a range of sectors, including tax planning, auditing, business structuring and corporate finance.
To find out more, visit www.duncantoplis.co.uk.